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Stocks for the Long Run: Caterpillar vs. the S&P 500

A long history of returns.

Investing isn't easy. Even Warren Buffett councils that most investors should invest in a low-cost index like the S&P 500. That way, "you'll be buying into a wonderful industry, which in effect is all of American industry," he says.

But there are, of course, companies whose long-term fortunes differ substantially from the index. In this series, we look at how members of the S&P 500 have performed compared with the index itself.

Step on up, Caterpillar(NYSE: CAT).

Caterpillar shares have slightly outperformed the S&P 500 over the last three decades:

Source: S&P Capital IQ.

Since 1980, Caterpillar shares returned an average of 11.5% a year, compared with 11.1% a year for the S&P (both include dividends). Even that small difference adds up. One thousand dollars invested in the S&P in 1980 would be worth $29,400 today. In Caterpillar, it'd be worth $32,500.

Dividends accounted for a lot of those gains. Compounded since 1980, dividends have made up 54% of Caterpillar's total returns. For the S&P, dividends account for 41.5% of total returns.

And now have a look at how Caterpillar's earnings compare with S&P 500 earnings:

Source: S&P Capital IQ.

Fairly significant outperformance. Since 1995, Caterpillar's earnings per share have grown by an average of 10.6% a year, compared with 6% a year for the broader index. That's a testament to global growth, its economies of scale, and a faster-than-expected rebound coming out of the latest global construction slump.

But interestingly, that earnings-growth dynamic hasn't led to higher valuations. Caterpillar has traded for an average of 19.0 times earnings since 1980, compared with 21.3 times for the S&P.

Still, the company has been an above-average performer historically.

The question is whether that can continue. That's where you come in. Our CAPS community currently ranks Caterpillar with a four-star rating (out of five). Do you disagree? Leave your thoughts in the comment section below, or add Caterpillar to My Watchlist.